National strategy for financial literacy and retirement savings: The New Zealand experience

Transcription

1 International Seminar on Social Security Employees Provident Fund, Malaysia National strategy for financial literacy and retirement savings: The New Zealand experience 14 July 2010 Michael Littlewood 1 Retirement Policy and Research Centre Economics Department Business School The University of Auckland Private Bag Auckland, New Zealand 1. Michael Littlewood is a co-director of the Retirement Policy and Research Centre, the University of Auckland. The opinions expressed in this paper are those of the author and not necessarily of the RPRC. 1

2 Table of Contents Abstract Introduction The New Zealand pensions framework: Background New Zealand Superannuation International comparisons KiwiSaver tax concessions return Tax treatment of private provision KiwiSaver The implications of KiwiSaver on behaviour Influence from the US behavioural studies KiwiSaver investment strategy: the default option Default strategy and the savings environment Assumed need for intervention Mis application of lessons from studies on behavioural finance Many more now have portfolio savings The need for financial literacy in a retirement saving context The respective parties involved in New Zealand Impact of KiwiSaver The New Zealand government s role Task Force s report Development of the Retirement Commission s role Education initiatives Regulation disclosure The New Zealand employer s role Efficiency of Tier Making the communication programme work Promoting action The employer s role summary The individual s role The role of the adviser A future without sellers? Overall implications of the New Zealand government s involvement The National Strategy findings on literacy issues The 2006 ANZ Retirement Commission Financial Knowledge Survey

3 6.2 The 2009 Financial Knowledge Survey Ngai Tahu Financial Knowledge Survey Improved knowledge? Lessons from the New Zealand experience Appendix 1: definitions References

4 Abstract New Zealand has a relatively simple retirement income system that seems, on a number of measures to be working. However, in the last three years, the retirement savings landscape has been made more complicated by the introduction of the world s first national, auto-enrolment, opt-out savings scheme that also re-introduced tax incentives. This is, perhaps, an experiment that New Zealand did not need to undertake. The regulatory landscape has also become more complex; again, probably unnecessarily. These changes complicate the environment for financial literacy initiatives. The roles of the respective parties that might be involved in financial literacy programmes (the government, employers, financial service providers and savers) need to be understood clearly. New Zealand is at the forefront of national financial literacy programmes and, on the evidence to date those seem, tentatively, to be making some difference. New Zealand offers an example to other countries in both what, and what not to do about retirement income strategies and how those can affect individuals when they decide whether, when and how to save for retirement. 4

5 1. Introduction 2 New Zealand has probably the simplest retirement income environment of any country. In brief, it comprises two major components: Tier 1 3 : New Zealand Superannuation (NZS) is a relatively generous, universal, taxable pension payable from age 65 with modest residency requirements. Fuller details are in section 2. Tier 2 (there is no compulsory Tier 2). Tier 3: KiwiSaver aside, there are no tax subsidies or any required retirement savings. New Zealanders (and their employers) make their own arrangements about how, when and how much to save as a supplement to Tier 1 s NZS. KiwiSaver can be seen as an exception to this hands-off approach to public policy. It is the world s first auto-enrolment, opt-out, national saving scheme. KiwiSaver forms part of Tier 3 because, despite the auto-enrolment process, it is essentially voluntary. Because KiwiSaver is a new (2007) and relatively important government initiative, it forms part of the pensions landscape that is relevant to issues surrounding financial literacy. Section 2 summarises the key features of KiwiSaver. On the eve of the introduction of KiwiSaver in 2007, the Minister of Finance said: KiwiSaver now presents the chance for a new beginning for New Zealand in terms of saving and investing. It is the individual s equivalent to the New Zealand Superannuation Fund the opportunity for greater security in retirement. At the same time it will significantly increase the flow of funds in New Zealand for investing both here and overseas. The effects of such funds can be seen in Australia. By some measures Australia is now the world s fourth largest offshore investor. We, on the other hand, are one of the world s largest borrowers relative to our size. (Cullen, 2007) It is not appropriate for this paper to assess whether KiwiSaver might be working as intended; suffice to say that the new initiative is an important part of New Zealand s retirement saving environment. By way of context, some key comparisons between Malaysia and New Zealand are given in Table 1. 2 Sections 1 to 3 draw on a paper from the Retirement Policy and Research Centre (S. St John, Littlewood, & Dale, 2010, forthcoming). 3 Appendix 1 is a glossary of expressions used with a particular meaning in this paper. They are used with capital initial letters in the body of the paper. 5

6 Table 1 Malaysia and New Zealand comparisons Malaysia New Zealand GDP per capita (US$) 2009 $6,890 4 $29,500 Population (million) Life expectancy: 73.3 years 80.2 years Pension funds in economy (% of GDP) 56% (2002) 11.3% (2005) Unemployment rate % (Dec 09) 3.4% 7.1% Sources: Perry (2009), OECD, (2009), (2006);New Zealand Life Tables: , Statistics New Zealand, Central Statistics Office New Zealand has an ageing population and, as explained in sections 2-3, a relatively hands-off approach to retirement saving issues. Financial education has, therefore, a potentially more important role in helping individuals make appropriate decisions about deferring consumption. After setting the scene by describing New Zealand s retirement income framework, this paper describes some of the initiatives that New Zealand has adopted to help its citizens decide what is in their best interests. 4 Department of Statistics: MYR23,567 accessed here; at 31 December 2009 exchange rate. 6

7 2. The New Zealand pensions framework: The retirement income framework in New Zealand has, at its foundation, NZS, a flatrate, universal, taxable benefit, which is paid out of current taxation. There is some prefunding provided by the NZSF, as set out in the 2001 New Zealand Superannuation and Retirement Income Act. Until 2007, when KiwiSaver was introduced, New Zealand had been unique in offering little or no tax concessions for additional private retirement saving (S St John, 2005). Until then, only about 14% of the working age population was covered in traditional occupational retirement saving schemes that were subsidised by the employer (Government Actuary, 2008) Background New Zealand introduced the old-age pension in 1898 to provide some protection for the deserving poor aged over 65. Strict eligibility conditions included income and asset tests, good moral character and sober habits, and 25 years residency. Over the course of the 20th century, this pension was extended and by the early 1970s, there was a universal taxable pension payable from age 65, and a means-tested age pension payable from age 60. Responding to concerns that occupational superannuation had very limited coverage, a state-run, compulsory, contributory, Defined Contribution 5 savings scheme was set up in This was abandoned in 1977 in favour of National Superannuation, a more generous basic Universal state pension (Ashton & St John, 1988). National Superannuation was a flat-rate, taxable benefit financed out of general taxation, payable from age 60, indexed to net average wages, with eligibility determined by age and residency. Originally set at 80% of the gross average wage for a couple, its generosity was reduced over time and in 1985 a surcharge was imposed on other income providing a de facto income test (Ashton & St John, 1988, p. 24). Private superannuation schemes, largely the preserve of longer-serving, higher-income, male employees, remained tax-subsidised (Ashton & St John, 1988, p. 27). The favourable tax treatment of retirement saving was removed between 1987 and 1990, from which point, New Zealand became the first and only country to treat private retirement saving in the same way as other forms of financial saving (S St John, 2007). Facing fiscal constraints in 1990, the then National government attempted to turn the Universal National Superannuation into a fully income-tested, welfare benefit, clawed back under an income test that would have operated from relatively low levels of other income. The resulting political backlash led to the establishment of the Task Force on Private Provision for Retirement to defuse the issue. The 1992 report (Task Force on Private Provision for Retirement, 1992) essentially supported the status quo with respect to public provision and also the tax neutral approach to the treatment of private provision under the TTE arrangements. It opposed the introduction of a compulsory Tier 2 retirement saving scheme. In 1993, the three main political parties signed an Accord on retirement incomes policy, both public and private. The Retirement Commission was established and the basic pension renamed New Zealand Superannuation (NZS). While the Accord did not endure, 5 Words used in a technical sense are defined in the glossary (Appendix 1). 7

8 the basic parameters of NZS as set out in the legislation (New Zealand Government, 2001) retain broad political support. 2.2 New Zealand Superannuation The net rate of NZS for a couple is at least 66% of the net average wage (33% each for a married person). Indexation is annually via the Consumer Price Index until the floor of 66% is reached and then pensions rise with the net average wage. The dollar amounts are set out in Table 2. Only 10 years residence in New Zealand after age 20 are required, with at least five of those after age 50 (the 10(5) residency requirement ). The residence requirements can also be achieved after the State Pension Age of 65 years. Table 2 New Zealand Superannuation rates at 1 April 2010 Category Percentage of net average wage * Annual rate Annual Net Annual Net NZ$ (gross) (Primary Tax) (Tax at 38%) Single, living alone 42.9% $19,425 $16,542 $12,044 Single, sharing 39.6% $17,814 $15,270 $11,045 Married person or partner in a civil union or de facto relationship 33% $14,592 $12,725 $9,047 Married or in a civil union or de facto relationship, both qualify Total 66% $29,184 $25,450 $18,094 Each 33% $14,592 $12,725 $9,047 Source: Work and Income website: Note: supplementary benefits may also be paid to people receiving NZS, but they are income- and asset-tested as for other beneficiaries. *NZ $38,546 ($48,609 before tax). Note: 1NZ $ = MYR2.22 at 5 July NZS is unique internationally for its simplicity and effectiveness in providing a basic standard of living to everyone over 65. It is payable to each pensioner in his/her own right (individual entitlement). Although there is a specified couple rate, each partner of a married couple receives an individual pension that is taxed along with other individual income. NZS is neither earnings-related nor contributory and fulfils the role of a basic income. The Retirement Commissioner has described NZS as a remarkably effective, simple and secure foundation for retirement income. It means that New Zealanders - and especially women are less at risk of hardship in later life than people in many developed countries (Crossan, 2007, p. 4). 2.3 International comparisons When compared with basic age pensions internationally, and with other welfare benefits domestically, NZS is relatively generous. As a consequence, New Zealand has very low rates of pensioner poverty and hardship in contrast to many other countries, and in New Zealand compared to those on welfare benefits (Perry, 2009b). Nevertheless, while lowincome earners do well in an international comparison of public pensions, as shown in 8

9 Figure 1, workers on average earnings or above have relatively low replacement rates (OECD, 2005). 6 Figure 1 Net replacement rates at different earnings levels Source: (OECD, 2005) The replacement rates decline as income increases more quickly in New Zealand than in other countries including Australia. It should be noted that Figure 1 reflects only the mandatory, state-provided pension arrangements at Tiers 1 and 2, ignoring any voluntary private provision at Tier 3 (including occupational retirement saving schemes). Also, the high replacement rates in countries at the top of the league are usually only for those with a full contributions record. Finally, generous tax concessions in both Tier 2 and Tier 3 of retirement provision are common in many countries but are not included as part of state pension expenditure covering the pensions illustrated in Figure The OECD takes the living alone rate for the NZ calculations. In fact, at 31 March 2010, 325,254 NZS recipients (59.7% of the total of 545,014 recipients) were paid NZS at the couple s rate.(ministry of Social Development, 2010 Forthcoming) 9

10 3. KiwiSaver tax concessions return 3.1 Tax treatment of private provision For nearly 20 years until the advent of KiwiSaver, saving for retirement in New Zealand had been a voluntary, unsubsidised activity. The tax regime for private and occupational superannuation schemes was the same as for saving in a bank: contributions, whether by employers or individuals, were out of after-tax income (T); fund earnings were taxed at a rate that proxied the individual saver s marginal rate (T), but withdrawals (benefits whether lump sums or pensions) were like a return of capital and hence tax-exempt (E). This TTE tax treatment contrasts with the EET treatment ( exempt contributions; exempt investment income; taxed benefits) that is conventional for retirement savings in other countries. Since 2000, there have been inconsistencies in this treatment but, until KiwiSaver, governments have broadly held the line on the TTE regime. For example, the Minister of Finance who was responsible for the introduction of KiwiSaver in 2007 said this in 2002: The government is not considering upfront tax incentives. These are likely to have to be very large - with fiscal costs running to many hundreds of millions of dollars a year - before they have any desirable effect on overall savings. Their abolition in the mid-1980s represented sensible tax policy on both equity and efficiency grounds. (Minister of Finance, 2002) By 2007, he had clearly changed his mind, influenced probably by the then large fiscal surpluses the government was experiencing. There was still a concern that many workers did not have access to an occupational saving scheme and that New Zealanders were not saving enough. It was in this context that KiwiSaver, a contributory, employment-based, retirement-saving scheme, was conceived. 3.2 KiwiSaver KiwiSaver was announced in the 2005 Budget for implementation from The original incarnation involved a very modest, tax-financed subsidy for simple, portable savings schemes. While employers could contribute, there was no compulsion to do so. The key premise of KiwiSaver was that people are more likely to commit to saving regularly if they are automatically enrolled when newly employed, rather than deciding whether to opt-in. Originally, the only government subsidies were a flat $1,000 sweetener (known as the Kickstart) paid on joining, and an annual fees subsidy of $40. These subsidies avoided the problems of the regressivity of tax concessions and left the TTE tax regime for saving unaffected. At this point, New Zealand looked like it was offering the world a natural experiment to ascertain the pure effect of an opt-out policy, uncomplicated by significant other incentives. Without detailing the many changes that have occurred in KiwiSaver s short life to date, Box 1 summarises its key features as at the date of this paper. While watered down from 10

11 an intervening iteration, in 20 or so years, KiwiSaver may be an important component of retirement provision for many. The scheme is open to all New Zealand residents under the age of 65 (3.7 million people), of whom about 1.7 million out of a total labour force of 2.29 million, are potentially entitled to tax-subsidised employer contributions. Those not entitled to that contribution include employees under age 18 and over age 64, temporary employees, domestic staff and some employees in seasonal agricultural work. The 31 December 2009 data shows that 35% of the eligible population (under age 65) have joined. Table 3 shows that a significant proportion (37.4%) of the 1,369,609 7 total members, net of opt-outs 8, had been automatically enrolled. However, nearly one third of those who were automatically enrolled had opted-out during the 8 week opt-out period. Table 3: Membership as at 31 March 2010 Method of joining KiwiSaver Members Percentage Opt-in via provider (active choice) 649, % Opt-in via employer 207, % Automatically enrolled 511, % Total membership (net of opt outs and closures) 1,369, % Opt-out 240,559 Closed (left country, died, mistakenly enrolled) 112,092 Active contributions holidays (includes financial hardship holidays) 40,517 Source:(Inland Revenue Department, 2010) Table 3 shows that of 752,550 members who were auto-enrolled on first starting work (or changing jobs), 240,559 (32%) opted out during the initial eight weeks membership. At 31 March 2010, there were approximately 806,000 KiwiSaver members in respect of whom employers were contributing 9, or 58.8% of all KiwiSaver members. The remaining 568,000 are children, individuals not in the workforce, self-employed or are in one of the exempt categories described above Of these, 245,538 members are aged under See: 9. Source: a private communication with the Inland Revenue. 10 This also includes members of alternative schemes etc. 11

12 Box 1 KiwiSaver as at March 2010 KiwiSaver is a voluntary, work-based savings scheme, administered by the Inland Revenue Department using the existing PAYE (pay as you earn) tax system. Employees are automatically enrolled into KiwiSaver when they start a new job. They have the second to eighth week of employment to opt-out and must advise their employer or the Inland Revenue of their decision. Having opted-out, they cannot be auto-enrolled again until they change jobs. Scheme enrolment is not automatic for workers under 18 or over 64, or those employed less than 4 weeks, or for existing employees when KiwiSaver started in They may join if they wish. Self-employed people and beneficiaries and non-workers can also join but make payments directly to the scheme provider. A maximum $20 a week matching subsidy is paid by the government for the member s contributions. An employee s contributions start from the first pay day with an employer. Deductions from wages are at a rate of 2% of gross pay, unless the individual opts for the higher rate of 4% or 8%. If the employee contributes, the employer must match that to 2% of the employee s pay but is not obliged to contribute more. Matching contributions up to 2% by the employer are deductible to the employer but are tax-free to employees. Funds are held by the Inland Revenue for a new member for an initial three month period after auto-enrolment during which the employee can seek financial advice and select a KiwiSaver provider. Savers can select their own provider and can change, but can only have one provider at any time. Those who do not specify a provider will be randomly allocated to one of, currently, six default providers that have been chosen by the government. Savings are locked in until the age of eligibility for New Zealand Superannuation, currently 65, except in cases of: financial hardship, permanent emigration, serious illness or after a minimum of five years (for those first joining after age 60) or to contribute toward a deposit on a first home. However, after a minimum 12 month contribution period, employees can stop contributions for up to five years by applying for a contributions holiday. Contributions resume at the end of the five years unless the individual applies for a further contributions holiday. Individuals (including employees who are on contributions holidays) can contribute what they wish, when they wish. Existing superannuation schemes may convert to KiwiSaver, subject to meeting certain requirements. Members of other schemes may choose to open a KiwiSaver account, instead of or as well as, their existing scheme. The automatic enrolment provisions will not apply in workplaces where the employer is exempt i.e. running a scheme that is portable, open to all new permanent employees, and has a total contribution rate (employer plus employee) of at least 4%. After three years membership, the government will also offer a first home deposit subsidy of $1,000 for each year of KiwiSaver membership, up to a maximum of $5,000 for five years. Source: derived from As at March 2010, there was around $5 billion held in KiwiSaver funds (2.8% of GDP) and the annual inflow was around $2.8 billion, including the government s contribution (1.6% of GDP). Table 4 provides the age profile of KiwiSaver members, which shows a surprisingly even spread of members across the age bands. However, there are substantial differences in membership as a proportion of age bands, as shown in Figure 2. 12

13 Table 4: Age profile as at 31 March 2010 Age band Members % of total members , , , , , , No Information 7, Total 1,369, Source:(Inland Revenue Department, 2010) Figure 2: KiwiSaver membership as a proportion of age-group population Source: derived from (Inland Revenue Department, 2010) There are 245,538 members between the age of 0 and 17 (22.7% of all New Zealanders under 17). Given that only a small proportion would have part-time jobs or have left school by age 17, most of these members have opted in, or were joined up by their parents to KiwiSaver by active choice. Children under 18 are not entitled to the member tax credit, but may benefit later from the housing subsidy and may be able to access their own saving in the scheme as a deposit for their first home. 13

14 4. The implications of KiwiSaver on behaviour 4.1 Influence from the US behavioural studies KiwiSaver s design was influenced by the results of studies from the US based on behavioural finance (see, for example, Mitchell & Utkus, 2003). These studies seem to show that most employees do not understand what decisions to make about retirement saving schemes: whether to join; how much to contribute; what investment strategy to choose. 11 Too much choice is seen as preventing employees from making any decisions, let alone making appropriate decisions. The research typically shows higher rates of joining if employees are guided to join, and to pick a realistic contribution level and an appropriate investment strategy, but then given the opportunity to change those decisions. The research also shows that employees tend not to move away from the default selections. Some of these studies were reviewed in the KiwiSaver design process 12, but the direct applicability to New Zealand was unclear (Toder & Khitatrakun, 2006). In the US, it is not hard to demonstrate that an employee who fails to join a scheme will be worse off financially than one who does. That is particularly evident where the employer subsidises contributions to the scheme, as is often the case. If the employee did not join, s/he would miss out on part of the available remuneration and valuable tax concessions. Despite that, many appear to act against their own best interests and choose not to join or, more accurately, fail to make the decision to join. KiwiSaver originally had none of the generous tax concessions available in the US, nor was it originally intended that it would be employer-subsidised. It was believed that the design of a savings scheme and the regulatory environment in which it exists can have a significant effect on both participation rates and the decisions that savers make during their membership. One of the key concepts, particularly for an unsubsidised opt-out scheme, is that of the default settings joining; contribution rate and investment strategy. 4.2 KiwiSaver investment strategy: the default option 512,000 current members of KiwiSaver schemes did not actively join or choose a KiwiSaver provider (see Table 3). Most of those will also have made no decision about the amount they are contributing; nor about the investment strategy adopted for that part of their retirement savings. For the six default schemes, the government specified the default investment option (at least 15% but no more than 25% in share/property investments). Other schemes can set their own defaults. In terms of the default investment strategy, there can be no single default setting that is appropriate for all. The issues are not clear-cut (Toder & Khitatrakun, 2006). The first observation is that the default option is bound to be the popular choice, for example see Beshears et al. (2006) and Madrian and Shea (2001). One possibility is to have a default option that is diversified across shares, property, bonds, and cash and where the proportion invested in 'riskier' assets (shares and property) automatically reduces with the member's age. In that way, savers who made no decision would be given a strategy 11 One of the reasons the decisions seem so complex in countries like the US is the plethora of rules created by increasingly complex tax and regulatory environments. 12 As described by a 2004 government-appointed group (Savings Product Working Group, 2004) 14

15 that was at least age-appropriate. However, the issue is more complex than first appears as people differ in their risk aversion or exposure to human-capital risk. This illustrates one of the difficulties with using behavioural research as a way of informing regulatory intervention: the intervention may be assumed to imply that the regulator (or employer, or scheme trustee, as the case may be) is effectively standing in the place of the investor and inevitably will be held responsible for the outcomes. Getting it wrong at least some of the time seems inevitable. Despite the fact that, in most cases, investors can move away from the default settings, evidence shows that most do not even if moving appears in their best interests. The design of the default option is therefore important both in itself (its effect) and also for the 'signal' it sends members as to what might be a 'good' strategy (Tapia & Yermo, 2007). 4.3 Default strategy and the savings environment Specifically, it is clear that participation increases considerably if enrolment is made default and opt-out, instead of a non-participation default but with a choice to opt-in (Beshears, Choi, Laibson, & Madrian, 2006). But care is needed when transplanting solutions that may be helpful in a US context (such as for 401(k) saving schemes) into an environment that has different economic drivers, such as tax and public pension provision. The US regulatory environment for both public and private provision is very complex and the so-called lessons from behavioural research may be no more than an intervention that is really designed to help savers make sense of complexity. The regulators may be better served with policies that simplify the pension and saving landscapes. 4.4 Assumed need for intervention Implicit in the intervention characterised by KiwiSaver is an assumption that New Zealanders were under-saving for retirement or, alternatively, saving inappropriately. Before KiwiSaver started, there were only 611,000 current members of formal superannuation schemes in New Zealand. Of those, 301,000 belonged to workplace (occupational) schemes; that is, about 14.7% of the workforce (Report of the Government Actuary for the year ended 30 June 2006). However, looking at just the formal retirement saving schemes discounts most of what New Zealanders have chosen to do about saving for retirement. In fact, after nearly 20 years of a tax-neutral, relatively level savings playing field, the available evidence, at about the time KiwiSaver started, tended to show that New Zealanders had been responding rationally to the need for retirement saving (Claus & Scobie, 2002; Le, Scobie, & Gibson, 2007; Grant Scobie, Gibson, & Le, 2004). Some commentators also worried that New Zealanders had too much of their retirement savings invested in housing, rather than productive financial assets. Again, the available evidence tended not to support that concern (Grant Scobie, Le, & Gibson, 2007). The first pre-kiwisaver data are now available from a longitudinal survey carried out by Statistics New Zealand 13. Using SoFIE data, Scobie & Henderson (2009) have estimated 13 The Survey of Family Income and Employment (SoFIE). 15

16 that, before KiwiSaver started in 2007, New Zealand households saved an average 16% of their gross incomes in the two years Taking property revaluations out of that estimate reduced the saving rate to 5%. When the next tranche of SoFIE s financial data is available from 2008, it might be possible to see if KiwiSaver has affected households saving patterns. However, separating out the specific impact of KiwiSaver is likely to be problematic, especially in times of changing economic conditions. 4.5 Mis application of lessons from studies on behavioural finance Most of the research relating to behavioural finance focuses on the relationship between scheme members, their market incomes (usually just from the employer that sponsors the scheme), and financial assets directly invested in the scheme itself for retirement. It does not usually include other assets that a scheme member might own (such as housing, entitlements to the state pension and other assets, including direct investments and the household s capacity to earn income during the period to retirement) all of which must have a significant bearing on a member's willingness (or need) to take on the risks associated with investing financial assets in shares and/or property in the particular savings scheme under review (or even joining the scheme at all). Not all employees need to save for retirement; on the other hand, they may need to save for retirement but not now because they have more pressing financial commitments such as completing their education, starting a family, buying a house or paying off debt. The lessons from behavioural finance do have direct implications for framing choices within complex saving schemes but what seemed like a 'simple' answer to the problem of, for example, investment choice for defined contribution scheme providers and sponsors may turn out to be simplistic. From a public policy perspective, the question is whether governments should be designing a regulatory framework that influences private behaviour to save particular amounts of money for retirement at particular times and in a particular way. It is one thing for the principles of behavioural finance to help employers, for example, to design a workplace retirement saving scheme and influence the choices the scheme offers. The employer s saving scheme is part of its remuneration strategy and one of the employer s objectives should be that the scheme s design works in the way the employer wants. It is another step for governments to force employers to intervene directly in a particular way in the compensation framework offered to employees, as has been illustrated by KiwiSaver. There is a final problem with the evaluation of soft compulsion: auto-enrolment is supposed to provide a nudge to assist people to behave in the right way; in this case, to save more for their retirement. It is impossible to assess whether the nudge has been successful if at the same time there are significant monetary incentives to change behaviour; or if the wider economic climate changes the environment in which those decisions are being made (or not made). 4.5 Many more now have portfolio savings Whether or not the public policy intervention that KiwiSaver represents could then (2007) or now be justified, from the statistics given in section 3, it is clear that many more New Zealanders (now 35% of every New Zealander under age 65) will have 16

17 portfolio-based retirement savings than in the past. Even if KiwiSaver does not result in higher amounts of saving for retirement, members will need to address KiwiSaver saving levels and investment strategy from time to time. This presents potential challenges for those with an interest in communicating financial messages to New Zealanders. In a Defined Contribution environment like KiwiSaver, where the benefits from a given set of contributions depend on the investment returns, it is almost inevitable that members should say where their money is invested. This implies that they should have the right to decide who manages that money. But too much choice in a small country can be costly for individuals, providers and regulators. The balance between individual choice and what is sensible and what is cost effective for New Zealand s KiwiSaver has yet to be reached. 17

18 5. The need for financial literacy in a retirement saving context 5.1 The respective parties involved in New Zealand KiwiSaver is a national arrangement that tends to transcend the normal provider/client, employer/employee relationships. KiwiSaver is, in the first instance, run and enforced by the Inland Revenue, the New Zealand government s tax collection agency. Then there is the direct involvement of the government in the selection of the six default schemes. This process tends to distance the providers from their customers because it is the government they must satisfy in terms of performance of their statutory responsibilities. KiwiSaver aside, there are normally three parties with an interest in the sensible retirement behaviour by individuals. In ascending order by numbers involved, they are: The individuals themselves (and their families); Employers that may want, eventually, to see the retirement of employees at an age when they can no longer perform the roles for which they have been hired; The government that has at least a residual obligation to old people who, for whatever reason, do not have enough to live on when they can no longer support themselves. This will also often include the provision of some form of sheltered accommodation when the old can no longer care for themselves. The financial advisers also, arguably, have a stake in this process, if only to act as facilitators in helping individuals to understand the implications of the decisions they face. This section 5 looks at each of these groups in New Zealand in the context of the need to transmit useful, usable information. It also proposes a new potential delivery channel for information that will change the need for information and its format. The delivery of financial information will be affected by these relationships. Financial education programmes need to recognise the different roles in the present and possible future environments. 5.2 Impact of KiwiSaver In New Zealand, KiwiSaver has changed the usual dynamics of the relationships described in the last paragraph for several reasons: Government mandated: KiwiSaver is a national strategy that was imposed on employers, employees and other individuals. In the past, employees and other individuals chose to save for retirement because their employer, an adviser or other personal contact suggested this was appropriate; or they themselves arrived at that conclusion. For employers, past practice usually required the employer to decide first whether it wanted to offer some form of retirement savings scheme. That no longer applies with KiwiSaver. Default providers: Six KiwiSaver providers were effectively handed business through the default provider process. At 31 March 2010, 37.3% of all KiwiSaver members had joined in that way. Default membership requires no active decision by the saver and so the providers can take a passive, compliance-based approach to communication. 18

19 Economics of KiwiSaver: At present, all KiwiSaver providers are recovering their establishment costs. These were substantially, adversely, affected by the last-minute changes to KiwiSaver. The fee structure was effectively driven down by the tender process under which the government chose the default providers. Those appointments were made in the early, pared-down version of KiwiSaver and the providers were not given an opportunity to respond to the new richer environment that was announced only six weeks before KiwiSaver started on 1 July Providers will usually have difficulty in raising overt membership charges because of the universal nature of the competitive KiwiSaver environment. These cost pressures will probably limit the resources that providers are prepared to direct to educational initiatives. That said, KiwiSaver will for many years comprise only a relatively small proportion of New Zealanders financial assets 14. There remains the wider issue of educating New Zealanders about the financial provision for retirement, of which KiwiSaver will be a part. 5.2 The New Zealand government s role Of the four potential parties with an interest in the savings behaviour of individuals, the government has perhaps the largest stake in the rational responses of its citizens to the need to make adequate financial provision for retirement. In a modern welfare state, the government stands as the provider of last resort with respect to both health and sheltered accommodation costs that tend to be at the most expensive in the last years of a retiree s life. The retirement income strategy also involves potential fiscal risks for the government. Based mainly on the relatively generous Tier 1 (NZS) described in section 2, New Zealand currently has one of the lowest poverty rates amongst those over age 65 who are retired (OECD, 2008). The OECD brackets New Zealand with the Netherlands and the Czech Republic as top equal in the mid-2000s amongst the 30 countries compared. While such comparisons need to be used cautiously, there is little doubt that NZS is an effective way of underpinning the current living standards of the retired (Perry, 2009a). Demographic change implies that the cost of NZS in its current form will double over the next 40 years, from about a net 15 4% of GDP to 8%. The costs of healthcare will also reflect the changing age structures of New Zealand s population. Although there is currently no sign from the government that this is under consideration, given the contribution that taxpayers will be making to the accumulation of KiwiSaver benefits ($1.05 billion in the year ending 30 June 2010), it would seem logical that a future government might link NZS through a means test to KiwiSaver. A similar link applies in Australia to its equivalent of NZS, the Age Pension (but applies to all assets and income, not just those derived from Australia s compulsory saving scheme). Even if that did not happen, if supplementary private provision, now including KiwiSaver, proved inadequate in the future to support a politically acceptable standard of living for the retired, a future government might be asked to increase NZS. 14 Net financial assets of New Zealand households in 2006 were $NZ131 billion (G. Scobie & Henderson, 2009) or 84% of 2006 GDP. By contrast, Kiwisaver had only $5 billion in total at 31 March NZS is taxable income for the recipients. The net cost allows for recovered tax. 19

20 New Zealand has suffered from 30 years of flux in public policy associated with the provision of both public and private retirement incomes. In 1991, a group was appointed by the government to investigate whether and how retirement income provision might be made sustainable. The government had been forced to recognise that New Zealanders needed more certainty in the pensions framework. They also needed better information about the things that mattered when they made their own retirement saving decisions Task Force s report 1992 For these reasons, the 1992 Task Force on Private Provision for Retirement stated: We also stress that improving public knowledge and understanding of retirement provision issues will be critical to the success of the approach we are recommending; simply changing disclosure and other regulations will not work. Poor public knowledge of the issues, lack of public trust in products, providers and advisers, and a widespread inability and/or reluctance to set personal targets for retirement income, consistently emerged as major barriers that must be removed if any policy is going to work well now, and last over coming decades. (Task Force on Private Provision for Retirement, 1992, p. 12) One of the recommendations from the 1992 Task Force was the establishing of what was then described as a new, independent body the Retirement Commissioner that would, amongst other things, supervise an independent public education activity backed by a public information process. The Task Force saw this as an important part of support for the then recommended retirement income framework: It would be equally important to ensure that the Commissioner s role is focused on the collection and dissemination of factual information. This would reinforce the idea of policy stability in the period between reviews, rather than the Commissioner being, or being seen as, an instrument of continual change. (Task Force on Private Provision for Retirement, 1992, p. 93) Development of the Retirement Commission s role The Retirement Commission (now so-named) has played an important role in the development of discussions on the Task Force s public education activity. The Commission s web site ( describes its role as follows: The Commission's big goals for New Zealand are: New Zealanders are well educated in financial matters and can make informed financial decisions throughout their lives. The government's retirement income policies are effective and stable. The financial services sector is trusted. The Commission sees financial literacy as only one of many contributors to personal financial well-being, as illustrated by the following Figure 3. 20

21 Figure 3: Contributors to Personal Financial Wellbeing (Retirement Commission, 2008) A key part of the Commission s work is the website Sorted ( that aims to improve New Zealanders understanding of all kinds of financial issues, including saving for retirement. Sorted lets users set goals (short- and long-term, budget incomes, plan short or long-term savings, understand KiwiSaver, manage debt, mortgages, insurance, investing, retirement, trusts and fees. There is also an associated suite of printed booklets and seminars with the Sorted brand. The Sorted web site has a consistently high visitor count. Based on the Commission s research: Overall, usage of sorted.org.nz increased from 19% (2006) to 28% (Dec 2009) of the New Zealand population. Usefulness of sorted.org.nz for visitors has increased from 50% (2007) to 65% (2010). 93% of visitors have taken action after visiting sorted.org.nz (May 2010). (Retirement Commission, 2009, p. 12 updated with personal communication) As part of its educational role, the Retirement Commission leads a formal National Strategy for Financial Literacy with its own web site ( The New Zealand Network for Financial Literacy describes its role as: The strategy, one of the first in the world, sets a direction and indicates a range of tactics for improving financial literacy in New Zealand. Its focus is on developing quality, through extending delivery of financial education, and sharing what works in order to achieve the outcome of a financially literate population. The Network, although led by the Commission, comprises a group that introduces itself as follows: Aiming to build a financially literate population is a hugely ambitious goal. This outcome cannot be achieved by one organisation alone. The involvement of the 21

22 public, private and voluntary sectors is necessary for implementation to be successful. Many organisations have endorsed the Strategy, and support working together to achieve the Strategy's mission statement that: New Zealanders are financially well-educated and can make informed financial decisions throughout their lives. ( Section 6 looks at the results of recent work done by the Commission and as part of this National Strategy Education initiatives In New Zealand, the government controls the curriculum in schools so the Retirement Commission s work extends to programmes that are aimed at young New Zealanders. The Commission suggests that the young must make...financial choices early in life which call for a degree of financial knowledge and skill that most don't have the opportunity to learn at school. The Retirement Commission is partnering with others to offer new approaches to help young people adapt to the major changes that have occurred over the past few decades so that they have money skills for life. 16 The Commission also provides Industry Training Organisations and employers with material that is suited to workplace training and education 17. Section 5.3 below comments on the employer s role. In addition, the Commission also makes teaching and learning resources available through its web site for tertiary education providers and for learners who want to follow a more formal path Regulation disclosure Another thing that only a government can undertake is responsibility for the regulatory environment in which retirement saving and other financial decisions are made. Despite the relatively simple pension environment in New Zealand that sections 2 and 3 describe, the last ten years have seen a considerable growth in the complexity of the regulatory and tax environment (Chamberlain & Littlewood, 2010). New Zealand still remains relatively simple by comparison with most developed countries where tax incentives create a need to erect regulatory fences around preferred saving vehicles. It is perhaps unsurprising to see an intervention emerge like KiwiSaver that is founded on the principles of behavioural finance as a way of helping savers to negotiate the regulatory minefields. In New Zealand, the regulatory requirements with which the promoters of financial services must comply leave much to be desired. The poor-quality information provided by the market either through product disclosure or professional financial advice makes it tough for retail investors to make wise investment decisions. It is difficult for relatively unsophisticated investors to find and understand the key information they need, let alone compare products in order to make a discerning choice. (Capital Market Development Taskforce, 2009) The Capital Market Development Taskforce recommended...simplifying and standardising product disclosure so that investors have clearer knowledge of what they See

23 are investing in (such as through short, prescribed, plain- English documents and an explicit warning on complex products). (2009, p. 13) Financial education and the skills needed to make appropriate decisions are significantly simplified when individuals do not need to turn to expensive professional advice. Also, arrangements that seem to be needed in the context of behavioural finance principles may indicate a need to simplify the regulatory environment. 5.3 The New Zealand employer s role As already stated, KiwiSaver has intervened in the relationship between employers and their employees. From a retirement saving perspective, some employers may now see the issue of the financial preparation for retirement as a government responsibility. With a sustainable safety net at Tier 1 along with a supportive information and education programme of the kind described in the last section 5.2, it could be appropriate to question why governments need to be concerned about what employers think or do about their employees retirement income provision at Tier 3. Shouldn t employers be left to get on with the business of being an employer: to make money, provide a service, keep their owners happy or whatever their raison d être might be? To understand how the interests of employers can be served under the banner of public policy, we first need to understand why employers are directly involved at all in retirement saving and how they express their interest in the financial welfare of employees. Employers have a demonstrated interest in helping their employees provide for periods of financial dependency. The fact that many employer-sponsored retirement income schemes started in New Zealand and then survived the withdrawal (during ) of tax incentives seems, at least anecdotally, to support the idea that tax-avoidance wasn t the real or only reason for their existence. In some ways, it is remarkable that employment-related schemes still exist in New Zealand, given the constant, disruptive and expensive changes they experienced between 1975 and KiwiSaver could well prove the final straw. Table 5 shows membership statistics of New Zealand work-based Tier 3 schemes over the period. 23